Why is Amazon paying $1bn for Lord of the Rings?

The epic fantasy series could be a very... precious investment.

by Arun Kakar

Published: 23 Nov 2017

Last Updated: 23 Nov 2017

If there’s any chink in Amazon’s normally impervious armour, it’s TV. Hollywood execs may have been quivering in their boots when the company announced it was entering the market in 2012, but the fear factor has since dissipated.

Yes, the Amazon Prime streaming service is emulating Hollywood with its very own sexual harassment scandal, but so far it hasn’t quite caught up when it comes to actually producing content.

There have been hits like Man in the High Castle, The Grand Tour and Transparent (though its lead star Jeffery Tambor will be stepping down amid harassment allegations...), but the company has been unable to sustain momentum from any of them.

This year’s offerings such as The Tick, The Last Tycoon and Z: The Beginning of Everything are failing to hit the mark. Did you hear about the show Amazon did with Woody Allen this year? No, no one else did either. Amazon Prime video remains in Netflix’s shadow.

‘I’m a huge fan of the company overall, but their entertainment division is a bit of a gong show,’ said David E Kelly, creator of Amazon show Goliath (and Little Big Lies).’They are in way over their heads.’

Founder Jeff Bezos has responded with impatience – and a sackful of dollars. Amazon paid £160 million for three 12-episode seasons of The Grand Tour, plus £10m a year for rights to tennis’s ATP World Tour Finals. There are rumours of partnerships with the NFL and experimentation with in-stream video ads, as Amazon attempts to broaden its appeal beyond dramas to (extremely expensive) sports rights.

Now, the tech giant has made its most epic purchase yet – a billion dollars (not a typo) to bring Lord of the Rings to Amazon Prime video, which would make it the most expensive TV show ever. Amazon is said to be forking out $250 million for the rights alone and the cost of shooting a six season fantasy TV show is mooted at around $750 million.

The multi-season deal will ‘explore new storylines preceding J.R.R. Tolkien’s The Fellowship of the Ring,’ according to the company.

What is Bezos thinking? The answer is in to be found in the company’s Prime subscription numbers. The whole idea behind Amazon Prime – which includes free delivery alongside video, music and cloud storage – is to make it a no brainer for every right-minded Amazon user, thus shifting the firm’s revenues to a much higher margin subscription model.

‘Amazon’s video strategy has to support the overall strategy of having people spend more time and money on Amazon’s other products and services,’ says Chris Kreinczes, Head of Insight at insights agency Canvas8, ‘people that take Prime Video renew their memberships at a higher rate, so getting the video strategy right is clearly very important.’

Although Amazon is notoriously protective of its figures, the number of Prime members is believed to be around 85 million worldwide to Netflix’s 109 million. It might seem like Prime is closing in on Netflix and its dominance of the market, but only 40-45 million members are estimated to be active users of the streaming part of the service.

But is a $1bn budget for the Lord of the Rings the right way to entice people to Prime?

‘Buying Lord of The Rings is completely against their previous strategy,’ analyst Tom Harrington of research firm Enders Analysis told the Guardian. ‘They are trying to buy their way out of their difficulties’.

Whilst this might be true, it does point to the sheer scale of their TV ambitions and where it sees the industry moving forward. More people are choosing to ‘cord-cut’ year on year: moving watching habits away from the TV into new media like laptops and tablet.

This year alone, 22.2 million Americans will have cancelled their cable and satellite subscriptions, up 33% up from the 16.7 million who did so in 2016.

Streaming is clearly the future, so banking on an existing brand with a massive audience, like Lord of the Rings, might be the easiest way to land a truly epic hit before Netflix leaves Prime in the dust of Mordor.

‘The creation of a Lord of the Rings streamable series demonstrates the huge economic value of licensing well-established copyrights and trademarks,’ says Laurie Heizler, of counsel law firm Barlow Robbins. ‘In new media, the goodwill can be vastly extended to new audiences’.

‘Amazon’s loyal Prime audience is spending more time and money on Amazon products, so it is natural that the company is looking for blockbuster content.’

A big message-sending bid like this might just be what Prime needs to reach its, well, peak...